UOB Kay Hian re-initiates ‘buy’ on Manulife US REIT with TP of 47 US cents

The "buy" call came as analyst Jonathan Koh sees the negatives as largely priced in within the REIT’s unit price

UOB Kay Hian analyst Jonathan Koh has re-initiated coverage on Manulife US REIT (MUST) with a “buy” call as he sees the negatives as largely priced in within the REIT’s unit price. He has also given the REIT a target price of 47 US cents (63.1 cents).

“MUST has endured a series of downsizing and non-renewals by key tenants with the latest setback being early termination by The Children’s Place at Plaza in Secaucus,” says Koh.

“We estimate that portfolio occupancy could deteriorate by 9 percentage points (ppt) to 79% by end-FY2024 if vacant spaces are not backfilled,” he adds.

In his view, the REIT’s low physical occupancy could cause more downsizing. MUST currently has the lowest physical occupancy of 30% among the US office REITs listed on the Singapore Exchange S68 (SGX) compared to its peers, Keppel Oak Pacific REIT (KORE) at 64% and Prime US REIT Oxmu’s 56%.

However, the analyst notes that the REIT is hampered by its large exposure to California and Washington DC which accounted for 36% and 8% of its portfolio valuation respectively.

MUST has also been deleveraging through divestments, to which Koh sees Phipps’ valuation dropping by US$48 million to US$162 million after factoring in the downsizing by William Carter with a cap rate expansion of 25 basis points (bps) to 6.1%.

“Assuming capex of US$25 million per year, we expect the divestment of Phipps and Tanasbourne (valued at US$33.5 million and completed in April 2023) to lower Manulife US REIT’s (MUST) aggregate leverage by 4.3ppt to 45.2%,” he writes.

Further to his report, Koh is estimating that MUST’s investment properties to drop by 15%, or US$250 million, to US$1.48 billion as at end-FY2023 assuming the cap rate for MUST’s portfolio expands another 50bps to 6.3%.

As such, he expects MUST’s aggregate leverage to increase and hit 51.5% at end-FY2023.

Koh has cut his distribution per unit (DPU) forecast for FY2024 by 45% due to a 969:1,000 rights issue with an issue price at 12 US cents, or a 30% discount to prevailing market unit prices to raise US$215 million. The rights issue is slated to reduce MUST’s aggregate leverage to 38% as at end-FY2024.

“MUST’s low physical occupancy of 30% represents headwinds in a depressed office market. It has to continue to deleverage due to likely revaluation losses at end-FY2023, which is aggravated by the recent series of non-renewals, downsizing and downturn in the US office market,” says Koh.

“Equity fund raising is difficult as it is trading at a steep 70% discount to [its] net asset value (NAV) per unit of 57 US cents,” he adds.

As at 10.52am, units in MUST are trading 0.2 US cents higher or 1.16% up at 17.5 US cents.

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